Monday, January 21, 2013

Why Isn’t Gold Higher?

Hint: Because it’s the Credit Default Swap of the Next Financial Crisis

Why isn’t gold higher? Two of the three reserve currencies of the world—the dollar and the yen—are on a relentless race to the bottom, and only recently have the Europeans figured out that they’d better start kicking the euro down, before they price themselves out of the global markets.

With this general fiat currency devaluation, you would think that gold would be much-much higher than it is now.

But gold isn’t higher—it’s drifting. Consider this chart of gold, over the last decade:

Click to enlarge.

Gold was on a relentless climb after the 2008 Global Financial Crisis—with good reason: The markets collectively deduced that the central banks of the world would devalue their currencies, in order to get out from under the mountain of private, consumer and sovereign debt.

Individuals might have decided to buy gold for different reasons—a hedge against volatile equities markets, worries about a run on sovereign debt instruments, etc.—but collectively the market participants all acted the same way: They bought gold as a hedge. (In fact, gold has no value except as a hedge.)

Thus the steady climb in the price of gold from $750 to $1900 in a little less than three years.

So far, so good.

But then starting in September of 2011, gold prices zoned out between $1,900 and $1,600. Instead of continuing on to $2,000 an ounce, $3,000, Infinity and Beyond, gold just drifted like a lobotomized patient spending some quiet time in a rubber room.

Gold has not outperformed anything since September 2011.

The conspiracy-minded claim it’s a conspiracy, natch. The Rothschilds, the CIA, and the little green men from Mars are all conspiring to down-price gold, to the detriment of the gold-buggers.

But I’m not one for conspiracies, not since I learned in grade school that a secret between two people is never a secret for long, and a secret between three or more people is no secret at all—just ask Lance Armstrong. If there’s a conspiracy, someone’s bound to talk. Since no one’s talking, my guess is, no one in any position of power has any more clue as to this drifting in the price of gold than any arm-chair conspiracy weenie.

So if we’re discounting conspiracies, that leaves us with the numbers—and the markets.

And an idea I have: What if the price of gold is drifting not because the markets don’t trust the world’s reserve currencies to continue to devalue, but because the market doesn’t trust gold?

Which reminds me of credit default swaps.

(Yes, I know: My brain seems fairly odd in its associations. Bear with me as I untangle the mess in my head.)

Remember CDS’s? They were essentially insurance contracts taken out to hedge against a particular bond defaulting. In the run-up to the Global Financial Crisis of 2008, credit default swaps rose in value—sometimes exponentially—as investors concluded that a lot of the triple-A rated bonds were actually junk, and would soon default like junk.

Credit default swaps were the insurance—the hedge—against exactly what happened in 2008: Bonds threatened to default, during the Global Financial Crisis. So the CDS’s insuring those bonds rose in value like a mofo—

—until suddenly, they didn’t: CDS’s stopped rising in value just when the markets collectively realized that the counterparties to those CDS contracts might not be able to pay up.

Because remember, an insurance policy is only as good as the counterparty’s ability to pay it off.

When all those mortgage backed bonds started to default in 2008, all those credit default swaps started to rise in value and/or needed to be paid off. This huge exposure to credit default swaps sent insurance giant AIG to bankruptcy, and credibly threatened to wipe out the entire global financial system in September of ’08.

When that point came, credit default swaps no longer were rising in price. Rather, they were jagging up and down, like the monitor readings of a heart-attack patient—which made perfect sense: Some market participants expected the CDS’s they were holding to be paid in full, while others weren’t sure that AIG or whatever other counterparty they were working with would be able to honor the CDS’s once the bonds they were insuring went bust.

So price discovery of the CDS’s was impossible while the crisis was raging. The prices of credit default swaps ran up relentlessly, as it became obvious that what they were hedging again—bonds defaulting—was going to happen. But then CDS prices went jagged immediately before and during the crisis itself, when no one was sure if the contracts would be honored.

In its shape, it’s identical to what’s been happening with gold: A relentless climb in price during the run-up period to the crisis—then jagged drifting right before the crisis.

We all know and understand what’s going on with the global economies and the fiat currency system: The global overindebtedness is forcing central banks around the world to devalue their currencies, so as to make the debt burden less onerous.

Many people—and I happen to be one of them—believe that this policy will lead to an inflationary crisis, which will spiral into an uncontrollable hyperinflation event. The key assumption in this scenario is that the only cure for runaway inflation—raising interest rates higher, and hard, like Paul Volcker did in ’79—will never be implemented by the world’s central banks, because they believe (with some justification) that higher rates will shove the global economies into a deflationary death spiral.

Thus a spike in inflation will bleed into hyperinflation, and by the time the central banks wake up and raise interest rates to stop it, it’ll be too late.

In such a case, gold would be the perfect hedge against inflation and eventual hyperinflation. In fact, even better than a hedge, gold would be the perfect investment, an investment that would outpace all other asset classes, because market participants would anticipate this inflation scenario, and thus pile into gold so fast and in such numbers that gold prices would spike parabolically, far outpacing the fiat currency devaluation.

Since everyone with any sense realizes that this is the endgame of the current race to the bottom, gold ought to be rising dramatically.

But that is not happening. Gold rose steady and strong from 2000 through September 2011—but since then it’s been drifting jaggedly.

So why would gold—which is an actual, physical commodity—be acting like credit default swaps did right before the 2008 crisis?

For the same reason: Gold buyers don’t trust the counterparties selling gold.

Because after all, most gold markets are paper markets, not bullion markets.

The various gold ETF’s, gold certificates, etc.—they are all based on the trustworthiness of the counterparty issuing the paper. The gold bullion is stored in vaults, and paper receipts against it are being issued.

But as more than one precious metals commentator has pointed out, there is more paper issuance of gold than actual gold bullion.

What does this mean? It means that the global precious metals markets are essentially a game of musical chairs, with far fewer seats than players—far less gold than gold holders.

And market participants collectively know this. Which is why they don’t trust their counterparties. Which is why gold isn’t rising like a shot.

There is only one market in gold, not two. There is no way to segregate gold bullion holders from gold certificate holders, and thus create two markets, one for the real thing, one for the paper thing.

Thus the current spot price of gold is reflecting market uncertainty as to who has actual gold, and who has worthless paper certificates of gold.

Do recall: The prices of credit default swaps quickly reached their market prices after the 2008 crisis had passed. They reached those actual market prices once the insolvent counterparties, like AIG, had been identified and isolated.

But before and during the crisis? When it wasn’ clear which credit default swap would be honored and which wouldn’t? CDS prices were jagged—like gold’s is today.

In the long run, assuming that central banks don’t manage to raise rates in time to prevent high- or hyperinflation, gold prices will go parabolic. But between now and then, gold prices will continue to drift, because the markets don’t really know whose gold is real, and whose is worthless paper.

I discuss in greater detail what will happen when hyperinflation hits the world’s economies at my Strategic Planning Group. If you are interested, please check out the preview page.

124 comments:

I just read about how the germans want their gold back but they are going to take it over seven years or something. Leading to speculation that they can't get it all now because title is encumbered or the gold maybe even isn't there.

If they are going to keep the physical gold in America a state secret then we have no other choice but to speculate about why they are keeping it a state secret.

And i for one do not trust the people who we are supposed to trust in these matters. At all. Not one iota.

I hadn't put it together with the price of gold though like this article does. Good thinking.

the gold is speckled with Tungsten, all of it, it has been devalued, whole blocks that people buy for 73,000 is really only worth 3600, so people are afraid to invest in gold, Germany might not have any gold here. It's a possibility that all the gold was purposely contaminated, or counterfeited in a last ditch effort to save the paper dollar....

Sincerely, I mean this in all candor. That is the public line so as not to cause price increases until the US Fed etc can get their hands on enough gold to pay back the Germans. The Germans are not 'truly' going to wait 7 years... that's just a public statement... The Germans are not stupid, they don't really believe this crisis anything but over. They will be pushing behind closed doors to get their gold in-house within 24 months IMHO.

If say, 3 guys are making billions on suppressing or manipulating Gold, would one of them tell ANYBODY? Not a chance. So I disagree on your post. It took Armstrong years of his conspiracy theories before the truth came out..

I wonder though, your argument as I understand it is that many of the players in the gold market are consciously aware of the counterparty risks caused by the imperfect link between paper gold and physical. If this were the case, shouldn't we be seeing a large and growing spread in the prices of real/paper?

Guys, the gold market manipulation (with official state sanction) isn't a secret. It's something that is going on and everyone pretty much knows about it, but cannot talk about it. That means it's a taboo, not a secret. Very different thing.

GATA has turned up so many state/central bank documents that prove this (on recent example being the BIS's "gold market rigging services" advertisement) that if you DON'T believe states/central banks/supra-national banking organizations are suppressing the paper gold price, I have a bridge to sell you.

exactly, the many interventions in the gold market are NOT a secret - they are policy! ... "central banks stand ready to lease gold in increasing quantities should the price rise" Greenspan to Congress, Jul 24th 1998

It may be true that someone eventually talks, but by then the public's attention has moved on. As long as no one talks when the public is angry about being cheated, conspirators won't get blamed.

Look at Pearl Harbor, enough people have talked and revealed there was in fact a conspiracy to provoke the Japanese. But with the war over more than half a century ago, it doesn't much matter. As the pace of news picks up, it takes less time for a leak to do damage. fifty years from now it will be established that 9/11 was just like the Gulf of Tonkin, just like the Maine, but no one will care.

You think 911 is not like Tonkin? Maybe you're right. 911 was much worse. Not only was it a complete lie to start an endless war, it also involved murdering thousands of Americans in cold blood to provide the pretext for not only an endless war, but also to make war against the American people thru the systematic dismantling of the Constitution and the natural rights we are guaranteed at birth.

In an interview with Kyle Bass (2011, I think, at UVA) he tells the story of taking possession of his gold. When he raised the question that there seem to be more "owners" of gold than gold to be owned, the response was "Oh, if everyone try to come through the door at once, we'll raise the price and that will stem the tide." To which Bass replied, "Oh, yeah....give me my gold." I say, if you own gold act like you do and put it somewhere you can see it and get to it. But... as my smart sister said when I was buying up gold coins years ago ($465/oz), "No one is going to give you change. Buy silver coins instead." Which I started to do. Bags of them. Tell me that I won't be able to get a tank full of gasoline or a trunk full of food when I offer to pay with a silver quarter or two.

It all depends if you can do the transaction without any problem in terms of most of these dumbed-down clerks even know how to handle "true" silver. And to go a little further, if there is panic and all hell breaks loose, then what good is silver/gold goin to do when there is no more gas? Be kinda dangerous to be traveling around with silver/gold in the crazy streets. Guess we just all have to wait and see how it will all play out. Besides, Silver/gold prices may not start to go up again to their all time highs until a few yrs from now from the looks of it...

I remember Bass buying millions of nickels (http://www.zerohedge.com/news/some-words-advice-kyle-bass) and back in the '70s during the energy crisis and gasoline rationing, I read (no citation) people paying w/silver coins were given preferential treatment - their silver wasn't worth any more at the pump, but if they were paying in silver, they didn't have to wait in line and/or were able to buy on the days they weren't supposed to be able to.

I think Bass is on to something w/nickels (and pre '82 pennies too). The populace may not be clued in on the old silver coins due to their being taken out of circulation in 1965, but they will come to realize that old nickels and pennies are worth more than their face value and these coins will be given preference. There's been talk (http://money.cnn.com/2012/02/15/news/economy/pennies_nickels/index.htm) to take the "nickel" out of nickels but I don't know if this has been put before Congress yet.

As to a gold suppression conspiracy. It's not a conspiracy, it's policy. (http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm)

"...Potential Application of the CEA to OTC Derivatives

The vast majority of privately negotiated OTC contracts are settled in cash rather than through delivery. Cash settlement typically is based on a rate or price in a highly liquid market with a very large or virtually unlimited deliverable supply, for example, LIBOR or the spot dollar-yen exchange rate. To be sure, there are a limited number of OTC derivative contracts that apply to nonfinancial underlying assets. There is a significant business in oil-based derivatives, for example. But unlike farm crops, especially near the end of a crop season, private counterparties in oil contracts have virtually no ability to restrict the worldwide supply of this commodity. (Even OPEC has been less than successful over the years.) Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise..."

Pardon my ignorance, but what is the mechanism by which "there is no way to segregate gold bullion holders from gold certificate holders, and thus create two markets, one for the real thing, one for the paper thing"? I would expect bullion to have a 30% or more premium over paper. What stops this from happening?

There are two markets already. When things go really bad this fact will be clear to even the most ignorant. Paper will will be bidless and physical will be the market. In the interim we will see the spread between the paper and physical markets widen. Watch it happen.............

It appears gold certificates issued by the Department of the Treasury are worthless paper.

Scott Alvarez, General Counsel for the Fed, appeared before a congressional committee in June 2011. He testified when the Fed turned its gold over to the Department of the Treasury in 1934, Treasury gave the Fed gold certificates.

He said the Fed has no interest in the gold.

He called the gold certificates accounting documents.

He sounds just like the MMTers.

They say all we owe China is a bank statement.

I'll hit the pause button and pop some fresh popcorn. It is indeed a hellava show.

This is a good article making a good comparison. I don't see gold anywhere near as volatile as a CDS. The quantity of gold out there is stable, unlike derivatives, which surpass the total amount of money in existence.

CDS were attractive for the commissions they brought the sellers. With gold, I think leveraging the physical and leasing it out is a source of extra profit.

If the owners of gold simply sit on their gold, they can't increase profits and are limited to changes in the money supply. The biggest argument that gold prices are being manipulated is the small trading range despite a massive rise in the money supply since '09. Maybe the price lags growth in the money supply, which tripled under Bush rising roughly at the same rate as the price as gold.

Any entity with sufficient physical gold in their possession can sell or lease it for cash. After all, if you're a bank or lender, who would you lend to-someone with gold as collateral or someone offering their own debt with nothing to back it.

Of course you want something for nothing to make more money. The quantity of gold-based derivatives has exceeded the actual quantity of gold because leverage makes more money. This is just like Grignon's video where the medieval banks always lent out more than they had as deposits.

There are only natural systems and complex systems, but no complex-natural systems. Natural systems tend towards stability and equilibrium, whereas complex systems require external stimulus in order to be sustained. Inevitably they fail. So too will the manipulation of gold and silver, they are currently examples of complex systems.

WRT conspiracies, I'm not a 'green man from space' type. In fact, I'm an airline pilot, and I've met astronauts. So I can simultaneously say, with confidence, that "chemtrails" are bunk, and men did in fact land on the moon. :)

That being said, you may find it interesting to know that the cosa nostra (mafia) had been in existence for nearly one hundred years before law enforcement even heard the term (in the early 1960s). Even then, they thought it was a local phenomenon. It took them until the 80s before they realized that the cosa nostra was an international crime syndicate, and that the Italian families were connected to the American families.

The point is that, when money and power is at stake, secrets CAN be kept VERY effectively. Conspiracies are real, and people need to learn what propagates them, in order to know how to fix our socioeconomic system.

well, you are more than probably a smart man, but one thing you spoke of is just bull. the fact is la cosa nostra was known about long before the 1960's and the feds knew much of them. we knew of them as early as the 1800's. we knew them well during prohibition, we used them extensively during WWII (think about the deal with lucky luciano), and we most certainly (the cia), for the conspiracy to assassinate kennedy. hoover acted naive and even stupid on the subject because such revelation of knowledge would surely jepordize many clandestine ops. anyway, the facts are that the FBI was forced to reveal its recognition og the mafia in 1957.

If there is nothing to lose, the secrets evaporate quite quick. But if you are in the situation, that by revealing the secret you would lose big part of your income stream at least. At worst case you could be even threaten for your life or life of your family. In this case secret can be successfully kept for quite long time.

Consider you are a businessman and you would disclose the secret. Than you are attacked and discredited by those in power and you can lose lot of you customers and your credibility. So you actually ruined yourself.

jpbeebles: You are not thinking of the Gold Derivatives (aka Paper gold) market. The problem is that the Paper gold market literally dwarfs the physical market. The physical market will see its real value only when the paper gold burns up.

Gonzalo, why don't you go and visit Zimbabwe and ask the locals how it all went down when hyperinflation hit. I'm guessing here, but you might find that gold was not the one thing they all wanted. maybe buying other commodities would be a better bet than buying gold. oh, and Zim is quite a nice place to visit anyway - so you'd have a good time.

largely true, but at the time it was possible to trade one's physical gold [eg krugerrands]in a neighbouring country for 'good' money and prosper in Zim. Trouble is when there is no neighbouring country because the whole world is in it.......... But what 'other' commodity? apart from silver perhaps. Same problems apply.

People dont study history. Manipulation doesnt only refer to supressing prices. Roosevelt manipulated the price upwards to support his policy. In th sixties you had the London Pool manipulation the price in the downwards direcction. But people always deny that manipulation happens in the gold market. Gold is an economic tool. It always seeks to balance the external debt of the USA

Anonymous 12:13, in Zimbabwe some people would spend all day panning for a few grams of gold to exchange for US dollars to buy their daily necessities while billions and trillions of Zim dollars blew around in the street. No, they didn't buy gold, they used it in trade. Those not so lucky to have a little gold bartered commodities (if they had any) paid for with their earnings (if they were lucky enough to have work in a 90% unemployment market). One GB of ram was 2 trillion Z dollars, a loaf of bread 100 billion.One of my favorite signs of the time was in a washroom on the border in South Africa and admonished you to use 'No cardboard, no newspapers, no Zim dollars'.

Prices in Zimbabwe for essentials was quoted in grams of gold.You had large numbers of people spending their time panning for gold so they could eat.Also could someone explain why if gold is going to $0,central banks are stockpiling the stuff when they could hold precious green paper with pictures of dead presidents?

If gold stays lower rather than higher & as many people as possible keep their 401K's & savings in the dollar, the Rothschilds (majority shareholders of the FED) & those who thrive in dollar denominated assets (the parasite known as Israel & rest of FED)do in fact continue making $ and the dollar remains somewhat of a reserve currency .So, it isn't a stretch to imagine why certain groups whose considerable influence runs national economies & currencies want things to stay the way they are.

Gold did not rise 'steady and strong' from 2000 through September 2011. This is readily apparent by reference to the chart at logarithmic scale which is more meaningful when considering the long term. The current well-deserved rest in the price of gold has lasted 17 months. The prior pause from March 2008 lasted 17.5 months. The one before that from May 2006 lasted 16.5 months.In view of the huge price increase before this 'drift' the jury should still be out. Perhaps in another couple of years this pause will hardly be noticeable.

Your point about "conspiracy theories" does not work. Manipulation of LIBOR is the counterpoint. How long did that go on without the secret getting spilled? Besides, when you listen to GATA's argument, they are not accusing little green men. They have very specific allegations for manipulation of the gold price. Also, the price mechanism for the gold market may be one indivisible number, but there is a true reality. The price has broken away from physical fundamentals. Because this is unnatural, it cannot hold forever. The truth will be revealed when the bill comes due and the paper gold is found to be a lie. Then the true value will be discovered and physical gold will be priceless in terms of dollar. I think you would agree with as much. My take away point is that manipulation of any price can go on for a lot longer than one would imagine. And it's always a hair-brained "conspiracy theory", until it's not anymore.

Gonzalo, these are good questions you raise; the solutions are held in futures and other paper markets as they exist. The markets will severely bifurcate, and backwardation will take place on futures contracts and other forms of paper with the value of the paper assigned according to the perceived integrity of the counterparty to the paper. The physical market will determine the price of gold and the paper will sell at various degrees of discount. The various instruments are obvious and transparent - you hold a futures contract (potentially worthless), an allocated warehouse receipt (worth as much as the integrity of the warehouse), an unallocated receipt (worth much less), or physical gold - worth 100% of that day's market price.Just as a mortgage held by a mortgagee against property holds more value in the heart of Beverly Hills than a wasteland in Detroit, (and I mean not in terms of absolute dollar value but in the likelihood of some percentage of the debt being honored) the audited allocated warehouse receipt for gold will hold more value than a futures contract promise for delivery of gold.In a severe financial crisis, if paper contracts cannot be fulfilled, settlement will revert to cash. If the counterparties cannot supply cash, their accounts will be liquidated and the margin forfeited. Because margin is adjusted on an almost daily basis, losses would be for unfulfilled margin. Meanwhile, the physical gold market would be the standard for price; all paper prices would be at a discount to the physical price. Of course, this mechanism already exists: spot vs future prices; the difference would be severe backwardation rather than the normal condition of contango.Sadly, because gold will be considered the settlement of last resort among sovereign states, private ownership of gold will possibly/probably be abolished again because of 'national security', with the price fixed arbitrarily low to local currencies. Of course the answer to abolishment is always the black market, so ownership of gold could never be totally abolished - your local pawn shop or or coin shop would be the new market for physical gold and silver. Or maybe the guy on the street corner.Robt_B

The Manhattan Project involved over 100,000 people and the creation of several cities from scratch. That was kept so secret that Truman didn't know about it until long after he was sworn in as President. The public didn't know the details for decades. The only people that knew about the project were the Communists that were given the plans and materials to build nuclear bomb factories by FDR and Harry Hopkins.

I'm not buying your theory, Gonzalo. Sorry. If gold was trading sideways to lower simply because there's a large paper market compared to the physical metal, how do you explain the general stock market's rise to near record levels? After all, that market is 100% paper and nothing but.

With all due respect, both markets are manipulated by the powers that be that see one as a threat and the other as a means to disguise real financial problems here in the US. Doesn't mean you can't make money trading in either. I do based upon charts and technicals, which in my opinion, incorporate everything from sentiment and psychological factors to fundamentals and manipulation.

You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government.And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.George Bernard Shaw (1856–1950)

Gold has no value except as a hedge? Absurd! The value of gold or silver is itself. As a standard and store of value it is superior to all paper and electronic currencies.Gold or silver in hand is not a promise to pay, it is payment in full. Value for value.If you can not understand those honest basic ideas then you can not be reasoned with on the subject of money.

It's really simple in the scheme of things...gold will continue to rise until we learn to live within our means. Ignore transient manipulations. Just buy what you can afford monthly and don't follow daily trades. You like me will then die rich...It's that simple. Nothing more to add - over and out.Auricluny.

You achieved your goal. You made me think. You raised a thoughtful question. It requires an answer. Is yours it? I doubt it.

If it were the case that "Gold buyers don't trust the counter parties selling gold" because it may not be there, than those uncertainpaper holders of gold would have a simple solution---Take Possession! When that day comes, all he'll will break loose in the gold market.Such a run on the bank does not require hyper-inflation. Simply put, once the market place sees it the way you see it---distrust in actualPhysical Gold Holdings--the price of gold will explode. We are not there---yet. But, we are getting there.

If there was massive distrust of the paper market everybody would be cashing in their chips by demanding physical delivery of their gold. Gold ETF owners would be selling their shares and using the proceeds to buy physical bullion. We would see a sharp divergence between the physical price and the paper price. That isn't happening. So, no, I see little evidence that distrust of paper gold is widespread among the people with serious amounts of money.

People buy gold for two reasons -- as a hedge against inflation and as a hedge against general financial calamity. Since 2008 large quantities of gold have been bought for the latter reason. Now that the major economies have appeared to have successfully papered over their financial imbalances and we no longer hear about giant megabanks about to crash, people are easing up on gold and buying other assets. It's as simple as that.

As I see it the United States is locked into a death spiral of ever larger government deficits. So ultimately I expect a continued and major devaluation of the dollar. But we have seen Japan run astonishing government deficits year after year for over two decades while still having very low official inflation. So it is clear that it can take a very long time for the shit to hit the fan.

"We are not there---yet. But we are getting there". Witness the Bundesbank's request for their gold. We are seeing the first early warning signs question able trust in gold holdings.For good reason, they want it back, but they don't want to roil the markets

The Bundesbank is making a very clear statement to the world. By requesting a small % of their gold back (19%) and by giving it 7years (2020)and by feeling "comfortable" with 50% of it out of the country in the hands of U.S. and U.K. Central Banks who offer no public accountability,They are telling the world that there is nothing to worry about. Rest assured, the gold is all there. As long as the marketplace buys it, therewill be no "run".

LOL, if you have silver or gold in paper form, then I am afraid, that all you have is paper. If you can NOT touch it in its physical form, then the silver or gold you own is a figment of your silly imagination.

Get physical and keep paper for wiping your ass.

Invest in LEAD as well, if you know what I mean.

If anyone has ears to hear:

1. Get out of the LARGE cities.2. Air, clothes, and shelter are no brainers.3. Be water independent, such as your own well.4. Food, both stored and the ability to grow your own.5. Means to protect the above, self, family, friends, and neighbors.

The writer here is being clouded by Western Finance which is in shambles. GOLD is moving slowly from the west to the east.China & India alone consume most of the gold.China is the #1 producer and does not sell to the rest of the world.The cash price will succeed the CRIMEX paper price as they can never deliver and either can any of the other paper scams.Anyone who thinks GOLD is a hedge against inflation does not understand Gold.It is insurance against Govt's gone mad.Gold will balance the debt in due time. It will be Western Finance's only cure if any.

This writer needs to stick to subjects in which they don't reveal themselves to be ignorant or child-like. Statements like "gold has no value except as a hedge" and "there is no manipulation" completely destoy your credibility. It's almost so bad I could associate the name "Gonzalo Lira" with someone I would never waste time to read. I'm sure he's an intelligent guy, he just has an prepubescent grasp of precious metals AKA REAL MONEY.

I'm surprised and dismayed by your dismissal of conspiracies to keep gold and silver prices down. First, GATA and many others provided conclusive--I repeat--conclusive evidence of manipulation. Second, they have also provided a clear, cogent explanation as to why our rulers want to keep gold down. Wouldn't you, if you had the fraudulent privilege of creating money out of thin air? Third, to say that "I'm not one for conspiracies" is to say that I either I'm working for our rulers and a liar, or that I'm politically naive. Didn't someone conspire to kill Julius Caesar? Have you, my dear Gonzalo, heard of Operation Gladio, or Northwoods? It being around MLK day, didn't you hear of a jury trial which found the USA guilty of conspiring to kill MLK? If not, kindly look these facts up before writing a single additional article. Fourth, your theory is not cogent. If people do not trust ETFs and such, they would buy physical gold, not stay out of the gold market.

The only thing remaining to be decided is this: Are you open-minded and fair enough to print this, or would you resort to another age-old conspiracy of suppressing unpleasant truths?

I agree with much of what you write. The exception is your statement "If people do not trust ETFs and such, they would buy physical gold, not stay out of the gold market." SOME people would buy physical. But MANY would just stay out of the gold market. I know many of those that opt to stay out - they tend to be some combination of the following: 1) lazy (they would buy if it meant clicking a mouse button to buy in their existing investment account, but can't muster the motivation or conviction to get the money out and actually march down to the local coin shop, etc.; 2) most of their funds are tied up in 401ks and IRAs, which lend themselves to E/paper gold and not the real stuff. There are ways to get IRA money into physical, but it's a process that even I don't completely understand (see #1).; 3.) they are still asleep and don't understand the potential importance of gold/silver/physical and don't understand that when it's obvious to everyone, it might be too late to acquire.

As for conspiracies, I completely agree with you. Well-written.

As for the automatic "they'd just buy physical" - there are lots of people that I've warned about "e"-gold, and all except one have just not bought anything. It's frustrating to witness.

I don't agree with this article. Why can't market participants buy gold futures and then take physical delivery? Also, GLD is backed by physical gold which is stored in underground vaults in London. If you don't trust GLD you can buy futures and take delivery and store it yourself.

Futures are paper promises, and I think the COMEX specifically allow contracts to be settled in paper money if the physical commodity isn't available. Effectively making it impossible for a default to occur.

All futures contracts eventually expire. When they expire you can take delivery or get paid in cash (if you have made a profit). Physical commodity is always available. If it was scarce the price would rise. This is how all markets work and there is nothing sinister about it. The distinction between paper gold and physical gold is meaningless since you can always take delivery when your contract matures.

GLD might own some physical, but there is no relationship between the size of GLD, and the amount of physical gold that it owns.This has been revealed openly by CNBC, although it was probably not intended.

ULTRA was a secret from 1939 until 197(2?)The French Army tested chemical weapons in Algeria until the late seventies and that was a secret until the late 90'sThe several failures of the Soviet N1 Lunar rocket were kept secret until the fall of the Soviet Union.

These aren't conspiracy theories but officially acknowledged today.

so secrets can be kept.

there's a very good reason for central banks to manipulate the price of gold: keeping up confidence in the value of fiat money.

Its easy the gov all over the world are keeping it down an only allowing it to slowly come up for air. These gov are the same gov that are printing so much money an puting it into the system.The banks all over the world dont make any money lending to the people they make trillions in the derivitive markets. The price of gold an silver should be the dow an the sp are at right now. Meaning the price of gold should be $13,750 an sp to silver $1,550. An also might i state all the currencies around the world are actually backed by gold an silver. Hence you can still trade your dollars into real wealth pms today. But when the word gets out the silver an gold wont be traded at any price.Then there is the old wise tail. The one who has all the gold can control the world. But today its the one who can control the price of it is the king of the world. I believe the gov will get to a point where all is lost nothing worth anything an they will have to let gold an silver rise so at least they can tax the hell out of it, This meaning to another interesting thought. If all these years you bought pms an loaded up on them slowly wear there are no gov reporting you have then the best pms worth the most wealth to you. The gov doesnt know you have it so they can tax you. Theres toilet paper pms holding paper. then theres etf holdings called electronic toilet float. Then theres physical pms that are good then there is the best. Pms nobody knows about.

pff since long i come here and find out that Lira is now dismissing people who question the offical story as people who believe in little green men from mars.... If you don´t even know that the gold market IS manipulated for centuries, then you have no busines writing here... Google Andrew Macquire, Ferdinand Lips or any other one who has been talking about this, from insider perspective for a long time already. Lira because your research is lacking, doesn´t mean it´s not there.... Pff i´m away here, not to return this time... Waste of time

If a large fraction of the people were really worried about counterparty risk then paper gold would trade lower than physical gold until so much physical gold was withdrawn from the paper markets and they were reduced in size so that the worry went away or the paper markets collapsed.

Physical gold can be lent out to earn a return. Many central banks do so. After it is lent, the borrower can lend it again to earn an additional return, so paper claims on gold could exceed the actual physical underlying gold unless, at some time, all gold loans had to be repaid and gold was returned to storage vaults. It is not in the interest of central banks to require repayment as it would cause physical gold prices to spike upwards and make gold seem to be a more desirable holding than the paper currencies that the central banks produce at a great profit to themselves (seigniorage). Thus, central banks, indeed, may engage in activities to depress the price of gold from time to time (to encourage people to keep holding their currencies). Also, individuals who want to ensure that they truly own gold should take possession. However, physical gold is illiquid and is expensive and possibly risky to store so, if paper gold claims could truly be trusted, they would be more valuable than physical gold of an equal amount. The fact that paper gold claims sell for less than physical gold suggests that the market doesn't fully trust paper gold. The market senses, as the author does, that the backing for paper gold is questionable, particularly in times of stress.

Without a doubt, paper-gold is not the same as physical-gold. Without a doubt, there's no way enough physical-gold exists to redeem all paper-gold, or even a tiny fraction.

Gold is being blatantly manipulated, just like the stock-market is being blatantly manipulated. There are no markets any longer, not in any area where there are also paper vehicles.

You can call this conspiracy or not. If you don't, this is certainly a wide open conspiracy that everyone with half a brain can see.

Ask yourself this. Is everyone at a high level in the federal government protecting individual rights as their oath and the constitution demand? Or are they predators spending every day enslaving mankind?

Yes, they are predators, and they are bent on enslaving everyone. And you say this is NOT a conspiracy? Are you serious? The world is so awash in conspiracies, they have apparently become as transparent as air to a great many [even intelligent] people.

The problem of not enough gold to cover the shares of the ETFs was considered by Stansberry in one of his newsletters. Their advice was to switch fro GLD to PHYS (Sprott) and CEF (Central Fund of Canada), which hold the bullion themselves and not paper. Being somewhat a neophyte here, am I wrong in thinking that this will avoid the missing gold trick?

I think the primary reason it's not still going up is that the reason it went up in the first place is purchases by the central banks. They were anxious to get money into the economy, and they bought gold. But there is a limit to that policy. At some point, they realize that they are simply putting money into the hands of people who are selling gold. A little of that is good for the economy, but a lot of it is just a waste. When the central banks stopped buying gold, the price started to level off. Simple as that.

Wow, Gonzalo! I've read a lot of smart articles from you but this is definitely not one of them - to put it VERY mildly. It would really help if at least you started thinking straight.

The essential difference between gold -physical gold, that is- and CDS is of course that all CDS, just like any other contract, have a counterparty risk: you may NOT get paid what you are entitled to because your counterparty just doesn't have the money/assets, i.e. is bankrupt. Physical gold in one's posession on the other hand, does NOT have counterparty risk: gold IS the payment/asset

Indeed, THE WHOLE POINT OF GOLD in an overleveraged, debt-saturated, currency-debasing world is that IT HAS NO COUNTERPARTY and yet it has money-like properties.

Also, unlike you're saying, OF COURSE THERE ARE TWO MARKETS IN GOLD. They may currently be not clearly distinguishable from each other, but precisely because of the existence vs non-existence of counterparty risk there is ALLWAYS a difference between trading a promise to deliver gold (paper gold) or trading actual gold (physical bullion). Go try, during a serious crisis, to trade a promise to deliver gold. It will not work. However, trading the real thing will.

Proof of there being two markets in gold also follows from a factual observation: at any point in time each ounce of gold can have only one owner. It can be debated who it is, but at some point either a judge, some force or the mere fact of posession will decide on that. As of that moment, those owning the actual gold hold a radically different value from those holding (what they thought were) promises to gold. If there was only one market in gold, as you claim there is, that difference in value could not exist.

Hence as the counterparty risk goes up, so will the value of physical gold decouple from and rise far above the value of (paper) promises of gold.

So yes, the value of (paper) promises to gold may at some point start to behave like CDS and go down. But if that were the case, the value of physical gold (or rather the premium for physical over paper gold) would be soaring at the same time. Currently, it isn't. That means your whole explanation of gold going down because it acts like CDS is just plain nonsense.

Of course the question then becomes what +does+ explain gold going lower? Well, my personal view would be: manipulation. But perhaps a simpler and equally valid answer would be: just your average correction. We had a similar one in 2008-2009, this time it's less deep, but to make up for that: probably somewhat longer. Jim Sinclair today put the end of this one before the end of March 2012, which seems reasonable.

So there's really nothing to worry about. Gold will go up. It must. It cannot be any other way as long as Central Banks cq governments keep intending & trying to debase their currencies. For there's one more piece of nonsense in your explanation: unlike you're implying, currencies by definition CANNOT be debased ALL simultaneously, nor even intermittedly, against each other. They can only to be debased AGAINST some external measure of value, which will then go up. And in a fiat currencies debasing-war, the only remaining currency-like store of value fit for that purpose is, behold: gold (and to some extent silver).

*Have you actually sat down and read any of the evidence GATA has collected since 1999 about the gold/silver price manipulation scheme? If you are like most everyone else, you have never even been to the GATA website and know next to nothing on the subject.

*Lance Armstrong? You mean the one who pulled off his doping conspiracy with doctors, teammates, etc. since 1999, which just happens to be the year GATA was formed? It only took 14 years to finally have Armstrong fess up and have the full story emerge.

*Somebody talking? You mean when whistleblowers Andrew Maquire’s testimony of silver market manipulation was brought to the attention of the CFTC in March of 2010? Testimony accompanied with emails of what JP Morgan was going to do in advance, and then it happened.

*Did you ever hear of the mega Libor market manipulation scandal, which took 22 years before whistleblowers at Barclay’s did "the talking?"

Imagine an island with a hundred 80 year olds. Each has 10,000 one oz gold coins to fund his/her retirement. How much is their gold worth? Let me add that there are no other people on the island other than these old people. Well, the gold is worth next to nothing because there's little to no productive economic activity going on.

Presently held gold functions as a claim on future economic production/assets. So gold functions the same as a debt which is memorialized in a note, which note, if trusted, is passed around and functions as currency. I'll give you a gold piece on Tuesday for a hamburger you'll make and I'll consume on that day. Or I'll trade you Unna's note for that same hamburger. We all trust her....

Even with gold, it's all about trust and economic production.

TPTB, through their control of governments, are playing all kinds of games with the fiat currencies they have direct control over. They print up a lot of units of purchasing power but make a grossly unequal distribution of them. Bankers first. Since people feel that the value of those units of purchasing power are likely to go down, people are losing trust in those units and are drifting into other currencies like gold. This is the meaning of gold being a hedge.

Therefore, expect TPTB to do what they can to decrease trust in PM. In the most extreme situation, even to the point of making possession of gold, or gold denominated instruments, illegal. If possession of an ounce of meth or an ounce of gold each gets you 10 fixed, which is worth more? And can you trust that baker who is willing to trade bread with you? He could be an undercover cop. Which is worth more, your contraband gold or his well paid government job?

We all tend to think inflation, but once TPTB have fixed their balance sheets (if they can and owning gold is a bet that they can't) what guarantee do you have that the central banks won't stop printing and will let the value of those “fiats” go back up? That's not to say I don't own gold...along with some of those cute new plastic see-through Canadian $20 “notes” with Lizzie's picture on them that are said to melt on the dash on a hot day. The Bank of Canada is reportedly looking into this. But I admit, Japan did prompt me to buy more gold.

In my universe many things have value besides gold. But all things of value also entail risk. The main risk in gold is political risk. That's because what presents as a potential currency crisis is really a political crisis.

FDR made gold ownership illegal for Americans in the dirty thirties...

Land -- I tend to agree with you except for one thing - climate change... you can buy a piece of land that was productive for the last few thousand years and have it become barren in a flash as climate change takes its toll. Drought, floods etc... plant diseases and pathogens will be migrating as the climate changes... The decimation of Canada's soft wood forests by the Pine Bark Beetle is an example.

It just occurs to me: Carney is coming to the Bank of England. Strange gold isn't through the roof. Why not? Let's play GL's game and say there's no conspiracy. It's just a problem with trusting paper gold what with the Germans asking for the real stuff back and all. And all those paranoid gold bugs – you know who you are – all talking their paranoid nonsense and getting everybody else scared....

But still you've got Bernanke on the job and Carney (ex Goldmanite and gee thanks John for that housing bubble you blew up in Canada which looks to be bursting even as we speak) now riding to the rescue in Britain. And there's Japan and ex Goldmanite Mario Draghi Etc. But still gold has no direction.

One fundamental (! please don't laugh !)) reason could be that debt, hence money, is being destroyed more quickly than they're choosing to create new debt, aka, Austerity, which is bad for gold. Cutting deficits is bad for gold. Print, but keep that printed buying power concentrated among the few and let the rest of the economy slowly blow away. Bad for gold. Herr Draghi has trillions for the Banks (gold should be up) but not a cent to fight a depression in half of Europe which is now beginning to affect Germany. Ach! That would be macro deflationary in the real economy and bad for gold.

People assume that governments will inflate the debt away. Why would they? It would cause higher interest rates which would blow up governments (along with the credibility of the entire economic-political system) not to mention destroying the wealth and trading opportunities of a lot of very important people. The slow boil – or is it the slow freeze – might be better.

Having saved TPTB, they now slowly pay down sovereign debt. No really. And the preferable way for that being lots of regressive tax hikes and every regressive spending cut neo-liberals can manage to get away with. No second can of cat food for grandpa. The country can't afford it. And no student loan for you, little girl. Be satisfied with that part time job at Walmart. You should have borrowed a few million from your parents like Mitt Romney told you to and become an entrepreneur. Unions? Free health care? Where do you think you live? Scandinavia? Canada? Those are socialist countries, and our country can't afford those things. Gotta keep wages low so we can have an economic recovery. All bad for gold. Could it be that this is what the market is sensing? Decades of no growth or negative growth? I really don't know. But I'm going to watch this closely. Oh, and pardon the snark. All just for entertainment purposes.

Remember that banks can print as much gold as they want. Gold has become an investment vehicle and if you look at your ETF contract, certificate or whatever gold fund you were buying you'll discover that there is no way for you to actually take delivery of any of the "gold" you supposedly own. So when demand rises the printing presses rev up to meet that demand. More supply on the market means lower prices. This is a suckers rally in any derivative. If you don't have physical metal you don't have anything, except some number on a computer. Or, if you're lucky, on a piece of paper...

Maybe I have to remind people that a dollar is a derivative. If you have one, you're better off having a paper version than a digital one. Gold, same thing either you have a gram in your hand or you have a paper promise to deliver one. Or even worse you have a share in an ETF that may own something, but won't ever pay out in the currency you invested in(physical gold).

Rick Ackerman:"One result that seems entirely likely is that banks in the U.S and elsewhere will not open for business the next day. Over the short-run — a few weeks, perhaps — this would be ruinously deflationary, since a hitherto inexhaustible supply of digital money will have become inaccessible via checks, ATMs or charge cards."

OK, I guess the tooth fairy, Santa and the Easter bunny are now "real" according to Rick...?

Rick, did you forget that there is an "electorate" out there..? If there's one thing the rulers are afraid of, it's the electorate!!! It won't happen, no matter what financial/political acrobatics they'd have to perform. It won't happen!

It's funny reading the commentary here, pretty much the only country that can make a believable claim on owning REAL physical gold these days is China.

All the other countries claiming to "own" gold, don't physically have it! There seems to be more "gold" in New York from the rest of the world than even the most NEW Yorkish guy would ever believe! (Man, those NEW Yorkers are rich!)

Right.. -Just like my next door gold "investor" tells me he has 2 tons of it.. Bought it with his trading monitor on the stock exchange last week!

That is so stupid that I don't even know how to counter it. GLD exactly tracks the spot price of AU, the metal (eroding ever so slightly over time as expenses are deducted). Check it out if you don't believe me. Read the GLD prospectus and you might understand why. GLD shares are freely exchanged for the metal. You and I can't do it, but certain large entities can, and do. In other words, arbitrage keeps GLD "honest". They have the gold, and they are frequently audited. GLD is backed by real gold. PS. Bob Pisani, or whatever his name is, is not an auditor.

About the comment that gold is "Only a hedge", this causes me some confusion. Gold is given extensively in India as a gift at weddings and such. Gold it used in certain electronics and industrial applications. Gold is most used in jewelry. And in some nations, it is used in currency. Doesn't this make it more than "a hedge"?

Also, is there any way to test the gold coins I buy to give absolute assurance that there is no tungsten? That would really tick me off.

The best info I've ever found is from Mike Maloney who wrote The guide to Investing in Gold and Silver". He analyzes the historical failures of every monetary system not backed by gold, ie, a fiat currency. They all fail within roughly 40 years. The current global scenario has all currencies tied to the dollar, which is the global reserve, but is a fiat currency. The FED is constantly devaluing the dollar, causing erosion of all other currencies against the dollar, which in turn causes them to devalue their own currency to "compete". Maloney calls this "the race to debase". Venezuela is a recent case in point. When the dollar is eventually repudiated, which is what has been starting as "rogue" govts like Iraq and Libya trade in gold, not dollars, and Brazil, India, China and Russia (BRICS) talk openly of trading in other than dollars, it will be game over. The FED will be forced to print into hyperinflation to avoid deflationary depression, causing the value of the dollar to go near zero. Computer trading has been used to short and long the metals markets to use fear to flush out those with weak understanding of these realities. They literally trade in one day as much gold and silver as is mined in an entire year! I've seen people buy gold high and sell it low thinking they were "saving what's left of their money". This reinforces the illusion that the dollar is real money. Meanwhile, billionaires, banks and governments are hoarding gold at a record pace. Eventually, the global rush away from all fiat currencies (and by extension electronic "assets" like derivatives, stocks, bonds and ETF's, including GLD and SLV) into hard assets will cause a corresponding hyperinflation of the "value" of gold and silver, etc, which, in reality, only maintain their original intrinsic, constant and universal value as real money.

well, we are just missing one piece.... a "black" gold physical market but... it might be around the corner. In most emerging countries you had in comparison the official USD price and... the black market one (usually much higher).

If there’s a conspiracy, someone’s bound to talk. Since no one’s talking, my guess is, no one in any position of power has any more clue as to this drifting in the price of gold than any arm-chair conspiracy weenie.Gold IRA

Some suspect that the Federal Reserve, in order to forestall a declining dollar and thus declining prices of dollar-denominated financial instruments, is behind the sales of naked shorts every time demand for physical bullion drives up the price of gold and silver. The short sales–paper sales–cancel the impact on price of the increased demand for bullion.

Ok, I have heard many sides and views. What do we know for sure?? A) the FED is propping the economy at the rate of $85 Billion per month to show a economic growth, artificially. B) All the prices of goods and services are increasing slowly, food, fuel, supplies, goods and services. A lot of us are chasing the same Dollar. C) look around at the Vacancy factor in commercial Bus. are there empty buildings? stores are still closing on lack of income. D) I 'am a gold & silver dealer, I was buying at $40 under and selling at $40 over 1oz, now I buy at spot or over and sell at $65 over. The start of separation from paper spot price, (what I know) I have a waiting list 30 people deep at this price. How ever I lent 40% of my gold reserve at a rate of 10% due to the election. Its due to be paid back in April. E) just like the rest of you I know gold is coming down, but i know not for long, a country (or ies) do not get to print money forever and expect to retain the faith in it. F) commodities have been a treasured asset for centuries, Gold, Oil, Food, Land, and soon Water. if you know of better commodities please let me know. G) Damage control since 2008, limit the losses, retain your assets, and try to make a profit, individual sustainability. Yes fort Knox could be empty and black helicopters are circling, WHO cares the gold is not yours or mine and they can watch me all day long, they might learn something...So in short what do your feel safe with?? I prefer Gold & silver, Food, Fuel, and Real estate to survive this mess..Best Regards G.Q.

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Well it certainly looks good not to be a conspiracy theorist, especially in the investment world. And then one of course has to tell one's audience : If there’s a conspiracy, someone’s bound to talk. But back to the real world now : was there rigging of the LIBOR rate going on or not? Was this also a conspiracy theory? How long was it going on before anybody knew about it? Apparently nobody DID talk until eventually someone did, but before that happens it can take years or decades or maybe even centuries. How long was Madoff doing his good work before he was exposed as the total fraud that he was? Was everybody who accused Madoff of fraud before it was really proven that he was an impostor a conspiracy theorist? So just to say that something isn't happening because somebody would have talked about it already and so one therefore can conclude that nothing is going on is very very sloppy reasoning to say the least. And a final argument against your trust theories is the following : does or doesn't somebody really know how much gold is in the vaults of the FED? Has somebody talked about it yet?Apparently not because nobody in the public knows about it for sure and this already for decades. However it is 100% sure that somebody HAS to know to real truth about this. So this fact alone is 100% proof that some things CAN be hidden for the public without someone talking and that for years or even decades or centuries. So by now you still think that the gold market can't be totally rigged because someone would have talked already?? Yeah right, someone will talk but for that to happen we probably have to wait another century.